Some of my clients come to see me because their financial planner has suggested they use a reverse mortgage product and the product provider requires they receive independent legal advice (not a requirement of all providers). The loan contract and terms and conditions have been sent to me directly by the provider. What do I tell them?
Some solicitors would not know where to start with such advice. That is not a problem as long as they admit it and send the clients elsewhere, or they spend some time boning up on the issues. Clients and their financial planners need to ensure the legal advice is coming from a solicitor who understands these products and can offer the right advice.
From the planner’s viewpoint, the solicitor’s role is to ensure the client can make an informed decision before entering the reverse mortgage contract.
From the solicitor’s viewpoint, their role is to ensure the client understands the product, to ensure the documents support everyone’s understanding and contain nothing that is not properly understood, and to ensure the client appreciates the possible risks.
From the client’s viewpoint the solicitor’s role is to tell them the idea is a good one and they won’t lose any money by going into it.
It is important for all concerned to recognise and accept the solicitor is not required to second guess the planner’s recommendations. Solicitors are not qualified for such a role. It is the client’s legal obligations under the product that the solicitor is focused on.
Most solicitors would not go through every clause of a long reverse mortgage contract with their client. They should, however, have read those clauses themselves and be able to explain to the client the more important clauses, how they work and what the possible downsides are.
Given the potential for a percentage of solicitors not being interested in advising in this area, a financial planner wanting to cement relations with a firm of solicitors may be well advised to assist the law firm to create a checklist in return for which the planner might recommend the firm to future clients for the advice.
In preparing such a checklist it is important to remember equity release products are not covered under the financial services legislation and are therefore regulated by the Uniform Consumer Credit Code operating in each state.
It is not possible here to cover everything that may need to be discussed by the solicitor with their client, but any checklist would include at least the following:
1. Precisely who is the owner of the property? Is the property free from all encumbrances that might make the product unworkable, such as pre-existing mortgages, leases or caveats?
2. What is the money to be used for? Has the client received the appropriate advice about the potential impact on their asset position if the money is used for a one-off lifestyle reason as opposed to say an income-earning asset or an annuity?
3. Is there a ‘no negative equity’ guarantee with the product that ensures the client’s debt will not exceed the value of the property?
4. Is the product provider a member of the Senior Australians Equity Release Association of Lenders (SEQUAL)? SEQUAL has developed a code of conduct that goes beyond the basic legal requirements so that members are required to meet high standards of design, advice, disclosure and ethics. A solicitor might do well to advise their client if the product provider on offer is not a member.
5. What are the risks? Will the client be turned out of their house, prevented from going away on an extended holiday, prevented from leasing the property while on an extended holiday, sued for the outstanding debt or have nothing to bequeath to their kids?
6. Can the loan be repaid at any time? Can the loan be taken to a new residence if the client decides to downsize? Will the loan have the effect of locking the client into the current house?
7. What are the client’s repair and maintenance obligations and insurance obligations in respect of the property? Are they materially different than they would be under a normal loan?
8. What will happen if one of a couple of borrowers passes away? Can a joint owner bequeath their half of the property to an heir other than their surviving spouse?
9. What will happen if one of several owners or if the surviving owner goes into aged care? Can a relative continue to live in the property or must the property be sold? What is the grace period? How will that turn of events be managed?
10. What happens on the death of the owner? Can a relative continue to live in the property or does the property have to be sold? What is the grace period before the loan has to be repaid?
11. If the property has to be sold, can it be sold by private treaty or must it be auctioned in order to speed up the process and guarantee success?
12. Do the answers to some of these questions change if the owner is cohabiting with a de facto partner or is in a gay relationship?
13. How will the entry into this product affect the client’s current will and will it be necessary to change the will as a result?
14. What steps has the client or their adviser taken to compare the particular equity release product with others available on the market?
15. What effect will the product have on the client’s social security entitlements and or tax obligations?
Planners offering reverse mortgages would do well to work closely with the client’s solicitor to ensure all of these questions are answered to the satisfaction of both client and solicitor and thereby minimise the chances of any long-term problems arising.
